The Link between Emergency Fund and Term Life Insurance

Term life insurance and emergency funds are two elements that are of equal importance in maintaining financial stability in financial planning. As the same these two are either interchanged or viewed more often than not. For different purposes they are designed in truth, although they have similarities.

Both will be discussed in this article including the relationship between the two. By reading this, your misconceptions will be straightened out. In addition, you will find here answers to the frequently asked questions regarding this matter.

What are term life insurance and emergency funds?
Term life insurance is a kind of life insurance that takes effect for just a term or a specific period of time as its name suggests. If you die from any cause during the duration, your insurer will pay your family. However, the coverage will cease if you will fail to renew it after it lapses. On the other hand, an emergency fund is a budget allocation for unwanted yet possible circumstances that come in unannounced. It is strongly recommended that you do not spend it unless an emergency takes place. It is like stored foods that must only be eaten during rainy days.

How important are they?
It is of great importance. The building blocks in financial planning are they. When a crisis blows up nobody wants to be in a situation where you can turn to no one. The last thing that you would like to end up doing if the bread winner of your family suddenly dies or when a member gets hospitalized borrowing money from private lenders would be. All the time if they cannot afford a permanent life insurance small investors should have these two. So you are always covered as it will be beneficial if you would renew it every time it would expire.

What are the differences between the two?
Intended for different purposes these two. For urgent situations that do not necessarily involve death of the person who built it is the emergency fund. It is projected for unexpected pregnancy, sudden unemployment, getting affected by the occurrence of natural disasters and other related incidents rather. The term life insurance is for the compensation of your beneficiaries should the insured meets an untimely demise meanwhile. Upon the death of the insured individual or when the duration comes to an end the first can be withdrawn right away as it is usually stored into a bank account whereas the proceeds in the other can only be withdrawn.

Why are they associated to each other?
As an emergency they are often linked with each other most of the time as an early death of a person can be deemed. In the case of the demise of the bread earner of the family this is true. The flow of income of the household will cease leading to more financial problems upon the incident. In your emergency fund that you can withdraw at the time when a crisis arises the lump sum that the beneficiaries will receive from the insurer is likened to the money. To some extent both offers security on urgent situations and their nature is the same.

Is it possible to arrange your emergency fund using your term life insurance?
Yes. You can do that in a way. Of course, you cannot withdraw the money that you are paying to the insurance firm as the terms and conditions would still apply while the agreement is ongoing. Since the contract is binding, your beneficiary will receive money only upon your death. However, in a way, if you will treat such incident an urgent situation, then your term life insurance can function as an emergency fund. In this perspective, the "fund" might be bigger than you could have saved. You cannot expect though that this will always be the scenario.
Should the latter be treated as a security blanket?

You should not treat the two as one ideally. If aside from availing of a term life insurance you will save up for an emergency fund as well it will be best. Their beneficiaries can claim a lump sum from insurance companies are reported cases of insured individuals who fake deaths. For emergencies which sprang up it is very possible that they have resorted to such act because they have not saved. Everything that life will throw at you it pays to be always prepared so you can conquer.